A local businesswoman, Jane Aire, has hired you and a colleague, Joanna, from your cost accounting class

Question:

A local businesswoman, Jane Aire, has hired you and a colleague, Joanna, from your cost accounting class to advise her regarding her small manufacturing business that makes leather valises. The business was organized just two years ago and has failed to become profitable, which is why the business owner has hired you and Joanna. After analyzing the client’s books, Joanna prepared the following simple income statement for the current year.
Sales .......... $200,000
Variable cost ...... (120,000)
... $80,000
Fixed cost ....... (140,000)
Operating loss ...... $(60,000)
After studying the income statement, Joanna worked out the break-even point for the firm and advised the client, “Ms. Aire, you will need to achieve sales of $350,000 before this business is producing enough revenues to cover all cost.”
Ms. Aire replied, “That’s a 75 percent increase over existing sales; I don’t see any way this business will reach that level of sales.”
“Then,” said Joanna, “you should shut the business down today to cut your losses.”
After considering Joanna’s income statement and the conversation between Joanna and Aire, discuss whether you agree with Joanna’s recommendation.

Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...